Short term Incentives

Short-term incentives are those additions to base pay provided to employees within the current
operating year. Organizations sometimes call their short-term incentives variable pay.
Short-term individual incentive plans reward employees for meeting such work-related performance
standards as quality, productivity, customer satisfaction, safety or attendance. Any one of these
standards by itself or in combination may be used. A company ultimately should employ the
standards that represent work that an employee actually performs. For instance, customer
satisfaction and sales volume measures indicate telemarketers performance.
Managers should also choose factors that are within the individual employees control when they
create individual performance standards. Furthermore, employees must know about standards and
potential awards before the performance period begins. When designed and implemented well,
individual incentive plans reward employees based on results for which they are directly
responsible.
Short-term incentives can take a wide variety of forms. They can be a supplement to the paycheck.
They can be separate amounts provided weekly, monthly, quarterly, or annually; or they can be
granted upon the achievement of certain a certain event or result. Short-term incentives range from
premium and differential payments for employees who work in unusual situations, to incentive
plans that pay for units produced, to bonuses for individual innovation and creativity, to awards or
bonuses for achieving all kinds of desired results, to the attainment of specific organizational goals
(profits earned, reduction in costs).
Types of Short-term Incentives
Attendee Bonus: Companies facing serious problem of absenteeism provide attendee bonus
to those employees who do not take unexcused leave. For example, General Motors provide
attendee bonus. As per the plan, an employee with no unexcused absence during the quarter
receives $50, as bonus. If the employee has no unexcused absence in three of the four
quarters, he receives additional $150 as bonus, thus his bonus amount becomes $300. In
case an employee has no unexcused absence during the entire year, he gets a year-end bonus
of $300, for a total of $500 for perfect attendance. Such plans vary from company to
company.
Length of Service and Seniority Awards: Although seniority rewards are normally a direct
part of the compensation system, some organizations recognize long service 1 0, 15, 20,
25, 30 years through some form of recognition awards such as diamond-studded lapel pin,
gold watch, etc. Tata Motors (Jamshedpur Plant) has an employment exchange where any
employee completing 25 years of service can get his son/daughter enrolled. The company
employs those registered in its employment exchange whenever there is vacancy in the
organization.
Referral Awards: Employees who refer applicants who accept employment and become
full-time employees receive a small cash award for their efforts. This award is generally
used only in tight labour market conditions. It is rarely a permanent part of a compensation
program.
Patent Awards: Organizations provide patent awards for the most creative of employees
whose inventions result in patents. Although most US organizations require research and
development employees to sign pre-employment contracts that give the firm all rights to
their creations, employees who develop patentable ideas usually receive some kind of bonus
or royalty. For the professionals who work in the research and development field, awards are
usually provided for filed and issued patents. Patent awards may range from $100 to $500 at

the time of filing for patent and similar bonus upon issuance of patents. A few firms are now
offering the scientists who develop patentable ideas a percentage of all royalties generated as
long as the individual remains with the company.
Suggestion Plans: Employee suggestion has been a major factor in improving operations,
products and services. Hence companies generally run suggestion schemes whereby
employees participate in improving systems/processes/operations. Some of the companies
that use suggestion schemes in big way include General Motors, Tata Motors, etc.
Employees get rewards in cash or kind in case their suggestion is found worthy of
application.
Special Achievement Award: Some organizations reward members who are elected to
office in professional organizations or who publish articles in trade magazine. Awards of this
nature range from$100 to $300.
Approaches to Short-term Incentives
Scanlon Plan
Lincoln Incentive System
Profit Sharing
Scanlon Plan
Scanlon Plan is recognized as a system of total organization development which consists of
assumptions about human behaviour, a set of principles for management of organizations and a
participative process for implementation. It is a misconception to view the Scanlon Plan narrowly as
an incentive system, quality of work-life program, suggestion plan etc. In fact, it is not a plan at all
in the sense that it does not specify a mechanistic procedure to be followed in standardized fashion.
Rather, it is a demanding process to achieve organizational productivity and human self-fulfilment.
Following principles define the Scanlon Plan and serve as condition of its success:
i.
Identity: The continual process of clarifying and understanding the organizations mandate
i.e. requirements to serve customers, owners, shareholders, employees. This process includes
recognition and affirmation by the majority of employees of the need to change in order to
manage more effectively all the organizations resources.
ii.
Participation: Acceptance by all employees of the responsibility for the mandate and the
opportunity to responsibly influence the decision-making process. Participation includes
accountability for ones own job and to all who have a vested interest in the enterprise.
iii.
Equity: The assurance of a fair and balanced return to customers (product value, quality,
delivery, fair price, owners (profitability, return on investment, growth), and employees (job
security, competitive wages and benefits, sharing in productivity gains).
iv.
Managerial Competence: The unequivocal requirement of leadership to define the right
job, to be open to influence, and to create climate for productivity improvement. The
identity, participation and equity are demanding tests for managerial attitudes, abilities and
performance.
The Scanlon Plan reaches its potential only as it becomes the primary tool for managing the
business. It is not an end in itself, but instead must become the means of defining and achieving the
expectations of customers, owners, investors, and employees. It cannot be delegated. Indeed, the
first step tests the top leaders ability and willingness to define the right job as an absolutely
necessary pre-condition for the participation of all employees in doing the right job.

Lincolns Incentive System

James Lincoln established an incentive compensation plan upon being made general manager of the
Lincoln Electric Company in 1914. After 20 years of effort, the incentive plan evolved substantially
and good number of companies adopted the same. Principle features of Lincolns Incentive System
are discussed below:
i.
ii.

iii.
iv.

v.
vi.
vii.
viii.

ix.
x.

The company guarantees 30 hours of work, 50 weeks per year to each employee who has at
least 3 years of service.
Standard job evaluation procedures set the base wages, using six compensable factors viz.
mentality, skill, responsibility, mental application, physical application, and working
conditions to determine relative importance of each job. Combination of job evaluation and
labour market requirements then set the actual dollar worth of the job.
Majority of workers are on a piecework incentive plan.
All employees may participate in the suggestion program with exception of department
heads and members of the engineering and time study departments. Any suggestion that
leads to organizational progress (improved manufacturing methods, sales, waste reduction,
new or improved products etc.) are considered during merit rating.
Twice a year, a merit rating program appraises the work performance of each employee.
After the first year of service, each employee annually has the opportunity to purchase a
limited number of shares of the company.
Employees elect representatives to an advisory board. This board has the opportunity to
suggest changes in policies and operations; however, the final decision on all changes is
made by management.
There is provision for independent work groups or subcontractor shop operations, in which
employees have the opportunity to earn specified piecework rates, perform their own quality
control and develop their own production procedures in completing operations within given
costs, quantity and quality parameters.
All profits of the business are split three ways: a. the firm retains certain share for capital
improvement and financial security; b. shareholders receive dividends; and c. employees
receive all remaining profits.
The annual cash bonus earned by the employees once approximated their annual earnings.
Recent bonus multipliers have ranged from 30 to 60 per cent of annual earnings as a
percentage annual earnings.

Profit Sharing
Profit sharing has developed hand in hand with the concept of democracy and the worth and dignity
of human labour. An early American sponsor of profit sharing was Albert Gallatin, who introduced
it into his glasswork factory in New Geneva, Pennsylvania, in 1794. M. Le Claire, owner of a house
painting and decorating business in Paris, France has been credited with being the father of profit
sharing. He earned this title not because his was the first such plan, but because it was one of the
most successful. He introduced his plan in 1842.
Today, profit sharing is widely accepted as a fundamental part of the compensation program
especially in developed countries (for example over 150,000 American firms have adopted profit
sharing as integral part of their compensation plan). Profit sharing has been defined by the Council
of Profit Sharing Industries as any procedure under which an employer pays or makes available to
regular employees, subject to reasonable eligibility rules, in addition to prevailing rates of pay,
special current or deferred sums based on the profits of business.
Essentially, three different types of profit sharing plans are wide used today:
i.
Cash or current payment plan which provides for the distribution of profits relative to some

ii.
iii.

pre-determined division by either cash or company stock, or both, within a short period
following the earning of the profit and the determination of the proportionate shares.
Deferred plan, which provides for placement of earned funds into an escrow account for
distribution at a future date (this plan usually provides the financial support for the pension
program of the business).
Combination plan, which has the features of both.